CBOT rejects settlement

$850 million deal would have let CBOE become public firm

March 07, 2008|By Joshua Boak, TRIBUNE REPORTER

Chicago Board of Trade members rejected an $850 million lawsuit settlement this week that would clear the way for the Chicago Board Options Exchange to become a public company, according to sources familiar with the situation.

The settlement would have given Board of Trade members a 15 percent ownership stake in the CBOE, ending a 2006 lawsuit that has delayed a public offering or merger for the options market.

Board of Trade members founded the neighboring CBOE in 1973 and retained exercise rights to trade there. The CBOE argued that the July merger between the Board of Trade and the Chicago Mercantile Exchange to form CME Group Inc. nullified those rights and any accompanying ownership claims, a position endorsed in a recent Securities and Exchange Commission ruling.

The rejected settlement also included a payment of between $200 million to $300 million to Board of Trade members. Parties involved in settlement negotiations estimated the payment and the ownership stake were worth about a combined $850 million, or roughly $640,000 for each of the 1,330 Board of Trade members. Those figures assume a valuation of the CBOE of $4 billion.

Under the terms of the July merger, CME Group guaranteed a payment of roughly $300 million for the exercise rights held by Board of Trade members. But the class-action lawsuit can only be settled by representatives of the Board of Trade membership, CME Group said in a statement Thursday.

The 930 members of the CBOE would need to approve any settlement, which would dilute their holdings once the options market became demutualized.

The members face a balancing act on any settlement, because sources say the SEC decision likely means the CBOE would not have to make any payments to Board of Trade members. But the litigation could drag on for several years, at which point the value of the CBOE in the marketplace could be less.

Exchanges are consolidating at a rapid pace, partially because of strong stock prices in the industry. Nasdaq Stock Market Inc. recently agreed to buy both the Philadelphia and Boston exchanges, while CME Group is in talks to acquire the New York Mercantile Exchange.